Canada: First World Market With Frontier Area Profits

by: Joseph L. Shaefer

Regular readers know that I believe investors are much safer and just as successful selecting investments in developed markets that respect intellectual and property rights, have vigilant regulators, and do not suffer from a culture of nepotism, bribery or corruption, as they are by buying companies in “developing” markets that do not share these qualities.

That would seem pretty obvious, wouldn’t it? Yet I see people regularly chasing the latest “hot China story” or “can’t miss Russian miner” or “once-in-a-lifetime Bolivian silver play!!” What do we know about these companies? Who audits their alleged results? What are the odds the government will simply nationalize their assets if they are too successful (or quadruple their taxes, effectively confiscating any value they might have as investments?)

Could this also happen in Canada? Australia? Israel? Germany? Switzerland? The US? Well, I suppose anything is possible but in these markets the Enrons and Worldcoms are remembered because they are unusual events, not because they are daily fare. I’ve seen Bolivia nationalize assets across the board at least three times in my investing lifetime!

I have written many articles advocating the purchase of savvy multinationals who are well-versed in developing markets and have some, but not all, of their assets there. For a macro view of this topic, the most recent of these may be found here.

I have extolled the virtues of Canada many times in these pages. But let me go “once more unto the breach, dear friends,” with a subtle difference this time – this time I want to talk about finding developing world frontiers within the geographic bounds of developed-world powerhouses. In my world view, it is better and safer to buy those who supply the faster-growing emerging markets than to buy the smaller, less-known-quantity start-ups in those remote locations.

Canada has 35 million people spread across the 2nd-biggest nation in the world. They are blessed with abundant water, timber, coal, oil, natural gas, iron, gold and all other manner of industrial and precious metals. Their 35 million people don’t need all this, nor do they need the copious grains and other foods they are capable of producing. What to do? Benefit from the population growth and headlong rush into industrialization and consumerism that characterize the emerging markets: sell to these nations.

Canada is the quintessential export economy, with a banking system in better shape than the US. (The World Bank ranks Canada #1 for banking stability.) We have owned scores of Canadian companies over the years and I see nothing on the horizon that would change that dynamic.

The world needs what Canada has -- and is needing more of it every day. Canada is blessed with water to spare -- water to drink, of course, but also water to use in fracturing and processing its massive energy fields (huge users of water, making this source of energy available to some, like Canada, but untapped to others, possibly like China.)

Canada actually has more proven reserves of oil than Saudi Arabia. The difference, of course, is that it is light crude in Saudi that yields to simply finding it and pumping it. (Well, it’s not quite that easy, but compared to Canada, it may as well be.) Most of Canada’s proven reserves are in bitumen, also called heavy sands, tar sands, or heavy oil. It’s laying there, right on the surface, but the processing of it is both energy- and water-intensive. It needs to be processed and much more heavily-refined, and that makes it more expensive. But it is there. And once liquefied, it can be sent via pipeline to some nation that really needs it -- like, say, Canada’s southern and only contiguous neighbor, the USA.

But it isn’t only fossil fuels that Canada has in abundance. It is the world’s major player in hydroelectric power, as well, generating more than 350 billion kilowatt-hours of power (roughly 60% of its total electricity needs) from flowing water. One of our other A’s ‘n’ B’s ‘n’ C’s countries, Norway, generates less for its much smaller population, of course, but as a per cent of total power used, tops the world. Its per cent of power generated from hydro is 98% of its total needs!

Then there is the fuel source I believe the world must embrace if we are to meet the needs of the earth’s inhabitants in the coming years. Solar, wind, biomass and geothermal must all be used, but they are currently incremental to the energy equation, not game-changing. The game-changer is still nuclear. The stupidity and cupidity of Tokyo Electric Power, operating plants that are no longer even considered for new construction, may have given us an unexpected respite in climbing uranium prices. Quality Canadians like Cameco (NYSE:CCJ) and Denison Mines (NYSEMKT:DNN) have declined to prices that reflect the belief that no new atomic power plants will be built in the future and those in operation will be shutting down. In fact, China has not delayed construction on a single new facility, nor has any other developing nation. Bowing to the Green Party, only in Germany have they opted to despoil their beautiful countryside with 25,000 wind turbines rather than replace 7 atomic power plants.

No matter who builds the plant, or where, or using what breakthrough technology, the operators of the plants will need uranium (and maybe some day thorium) to provide the world’s energy needs. Get on board this train before it leaves the station. And when you seek the uranium heavyweights (no pun), you will once again find that it is Canada that has the resources -- over one-third of all known uranium deposits on earth are in Canada.

As for the precious metals desired by many on this earth who cannot trust their own governments to honor their currencies, and the base metals so necessary to build a modern nation, again, some of the world’s largest deposits are already known to exist in Canada. Would I rather trust some dictator in an “emerging” nation to honor the contracted price for these metals or a nation that has a rich history of doing so?

When it comes to grains for human and livestock consumption, Canada is also a giant. You have only to drive across Canada, as I have done (or, better yet, take the train) to see, not acres or even miles, but endless horizons filled with wheat and other grains.

Many of our Canadian investments lie below the 49th parallel, a misnomer of a term in that many people think the US-Canadian border lies squarely along that line of latitude. In fact, it is merely a convenient shorthand, since more than 70% of Canada’s population reside south of the 49th parallel, including those in Toronto, Montreal and Ottawa. However many of the natural resources and virtually all of the “frontier” resources still lie north of that line. Click to enlarge:

In the east, Quebec, and in the west, British Columbia, are both finding more and more gold, silver, and other precious metals. Our favorite junior gold miner, Rubicon (RBY) is active in Ontario, as is their larger cousin, Goldcorp (NYSE:GG).

Saskatchewan has the good fortune to be rich in agricultural gold – and I don’t mean just the golden fields of grain. Potash, essential to increasing agricultural yields to feed a hungry world (and one increasingly moving up the protein chain,) is one of Saskatchewan’s many fertile finds, and they are really just now beginning to explore the northern reaches of that province. Mosaic (NYSE:MOS), while US-based, remains my favorite of the potash giants. (Besides, it’s in Minnesota, just a hop, skip and a jump from the 49th Parallel!)

Alberta is home to the best known of the oil sands giants, with Cenovus Energy (NYSE:CVE) our stellar pick there. CVE was recently spun off from Encana (NYSE:ECA), coincidentally our best pick of the best natural gas companies in the world.

Both Ontario and the NorthWest Territories (NWT) have significant base metal deposits, as does Labrador and the rest of the Atlantic Maritime provinces. Frankly, if “frontier areas” excite your imagination, much of the NWT, the Yukon, and Canada’s newest province, Nunavut, are barely explored. Literally, Canada has barely “scratched the surface” of what riches may lie in these areas. There are many companies, large and small, that will benefit from responsible exploration and production in these areas. I am quite certain that Cameco, Encana, Denison, Cenovus, Mosaic, and perhaps even little Rubicon will be among them!

All this in one of the politically most stable and economically most responsible nations in the world – with, by the way, the world’s most stable banking system to ensure credit and growth for these and other companies. Geographically, does it hurt for what is potentially the world’s largest producer of oil to be situated just a pipeline or two away from the world’s largest consumer of oil? I’m thinking not. But the trade of goods and services from Canada doesn’t flow merely from north to south. Blessed with a brilliant rail and highway system (Canadian Pacific – CP – is our favorite railroad in the entire world, although it is a bit too dear for our taste right now) goods and grains flow east to west and west to east, as well.

The port of Vancouver is closer to China and Japan than the port of Los Angeles or Long Beach. And that’s one reason why we like Teck Resources (TCK), North America’s largest producer of copper, metallurgical coal and zinc. I’m guessing that both China and Japan, and many others, will need those products shipped east-to-west across Canada to build their cities, rail lines, and other infrastructure.

Finally, may I suggest Canadian investments because every day the US dollar is purposely debased by our current government, securities denominated in Canadian dollars become more valuable. (Actually, they hold their value while the USD depreciates, but the effect is the same when repatriated in the dollars Americans must use to buy goods and services.) I’d rather own rising stocks of growing companies reporting in a currency that appreciates than any combination absent these three factors.

I’ve offered quite a few possibilities for your further due diligence, but I’d be remiss if I didn’t mention at least one more. Our favorite “big oil” is not Exxon (NYSE:XOM), Total (NYSE:TOT) or Shell (NYSE:RDS.B) – though, at the right price, we like them all. Our favorite is Imperial Oil (NYSEMKT:IMO), which we have dubbed “King of the Wild Frontier” in a recent article here.

If you want a company that is both aggressive in pursuing opportunities and has a proven track record of competence in frontier-area exploration, I believe you owe it to yourself to begin your due diligence of IMO.

There’s gold and more in them thar hills. And you don’t have to go to Cote d’Ivoire, the Congo, Siberia or Bolivia to find it. It’s all right here, right around the 49th Parallel -- with who knows how much more north of that line…

Disclosure: I am long CVE, ECA, MOS, IMO, TCK, RBY, CCJ, DNN.